Taxpayers Could Fund Insurance Industry 'Bailout' over ObamaCare

Consumers aren’t the only ones who could be eligible for subsidies under the Affordable Care Act.

There is a provision in the president’s signature legislation that provides reinsurance subsidies to insurance companies if they lose a certain amount in profits because their pool of policyholders is policyholders is too heavily weighted toward the more-costly unhealthy or elderly people.

Sen. Marco Rubio, (R-FL), along with several other Republican senators, introduced “ObamaCare Taxpayer Bailout Prevention Act” Tuesday to end these “risk corridors” which allow the government to pay insurance companies 50% of any losses above 3% above their targeted costs. If costs are more than 8% above insurer’s targets, the government is on the hook for 80% of their losses.

The provision has come into greater criticism after President Obama announced an administrative “fix” for the troubled law that allows consumers to keep their previously-cancelled plans through 2014 if their state or insurance company allows it. Experts say the fix can potentially skew the pool of policyholders toward what is called an “averse risk death spiral”—a scenario in which young, healthy people do not sign up for coverage and pay into the pool to help mitigate the cost of older and more sick customers.

“The risk adjustment works depending on the relationships between a plan’s projected premiums and their expenses,” says Yevgeniy Feyman, Manhattan Institute scholar. “If their expenses are higher than the premiums, they are eligible for a reinsurance subsidy.”

On the flip side, Feyman says insurers may owe the government back money if the actual expenses they pay are lower than projected, they will have to pay back into the system. But he doesn’t expect that to happen.

In a sense, the provision puts taxpayers on the hook for bailing out insurance companies due to the administrative fix, Feyman says. It’s unlikely taxes would increase as a result, but taxpayers could also be hit with higher premium payments in years to come.

“The language about risk corridors is vague enough that it could use taxpayer money,” he says. “This will cause premiums to go up in the future as well.”